Accepting an audit engagement is a significant responsibility for any accounting firm. Before agreeing to perform an audit, it is crucial to conduct thorough due diligence to assess potential risks and ensure that the firm is well-equipped to provide quality audit services. This article will provide a comprehensive overview of the key considerations that auditors should evaluate before accepting an audit engagement.
Background Information
1. Client Profile:
Gather detailed information about the prospective client, including their name, contact details, industry, business description, and financial year.
2. Associated Risks:
Identify any potential risks associated with the client’s industry or business activities. Consider factors such as regulatory compliance, financial stability, and reputational concerns.
3. Position in Industry:
Assess the client’s market position, including their size, market share, and competitive landscape.
4. Organizational Structure:
Understand the client’s organizational structure, including subsidiaries, parent companies, and key personnel.
5. Referral Source:
Determine how the client was referred to the firm. This information can provide insights into the client’s reputation and the reliability of the referral source.
Eligibility
1. Compliance with Regulations:
Ensure that the firm meets all eligibility requirements set forth by relevant regulations and professional standards.
2. Industry Knowledge and Experience:
Assess whether the firm’s personnel possess the necessary knowledge and experience to audit the client’s industry and business.
3. Regulatory and Reporting Requirements:
Determine if the firm has a clear understanding of the applicable regulatory and reporting requirements for the client’s industry.
4. Expert Availability:
Identify any specialized expertise required for the audit and ensure that the firm has access to qualified experts if necessary.
5. Timeliness:
Evaluate whether the firm can complete the audit within the required timeframe.
Management Assessment
1. Legal Compliance:
Inquire about any legal proceedings or regulatory investigations involving the client or its management.
2. Management Dominance:
Assess whether the client’s management is overly dominated by a single individual or small group.
3. Risk Tolerance:
Evaluate the client’s risk tolerance and compare it to industry norms.
4. Financial Pressure:
Determine if there is any pressure on the client’s management to achieve specific financial targets.
5. Compensation Structure:
Review the client’s management compensation structure to identify any potential conflicts of interest.
6. Internal Controls:
Assess the strength and effectiveness of the client’s internal controls.
Industry Background and Risk Factors
1. Going Concern Assessment:
Consider whether there are any substantial doubts about the client’s ability to continue operating as a going concern.
2. Contingent Liabilities:
Identify any contingent liabilities that could have a material impact on the client’s financial statements.
3. Financial Statement Analysis:
Review the client’s financial statements for the past three years to identify any trends or red flags.
4. Industry Analysis:
Research the client’s industry to understand key trends, regulatory changes, and potential risks.
By carefully considering the factors outlined above, auditors can make informed decisions about whether to accept audit engagements. Thorough due diligence helps mitigate audit risks, ensures the quality of audit services, and protects the reputation of the accounting firm.
Client acceptance or continuance
When should an auditor accept a new audit engagement?
Auditors should only accept a new audit engagement, or continue an existing audit engagement if the ‘preconditions for an audit’ required by ISA 210 Agreeing the terms of audit engagements are present. ISA 210 requires the auditor to: Obtain the agreement of management that it acknowledges and understands its responsibilities.
How do I perform an efficient review of an audit engagement?
Below, you’ll find nine steps to perform an efficient review of an audit engagement. 1. Review the firm’s planning and the engagement profiles and complete questions in Section I, “General Audit Planning Procedures” of the audit engagement checklist. 2.
What happens after a client accepts an audit engagement?
After the decision is made to accept an audit engagement, the auditing team does a thorough risk assessment of the client’s company, which includes assessing the industry, management’s integrity, governance procedures, and internal controls.
How do you plan an auditor engagement?
1. Plan ahead During the planning stages, auditors typically send a list of information required before the engagement commences. You can enquire from your auditor what information/documentation is required based on priority and plan accordingly so excessive time is not taken away from day-to-day tasks.